Introduction to Wall Street Research
Wall Street research has long been a cornerstone of the investment world, spawning the research analyst career path and keeping firms at every part of the investment process informed. Without Wall Street research, it would be impossible for brokers and portfolio managers to implement any sort of smart investment strategy.
In short, they’d be flying blind.
No matter where your role or company falls in the financial ecosystem, you can use Wall Street research to make better decisions, find new opportunities, and keep your organization ahead of the curve. In The Insider’s Guide to Wall Street Research, we’ll dive into what exactly Wall Street research is, who creates and consumes it, and how it plays a pivotal role in the continued evolution of the investment landscape.
What is Wall Street Research?
Wall Street research analyzes companies and stocks to help firms, portfolio managers, brokers, and investors make smarter, more informed investment decisions. Wall Street research includes company and industry analysis, financial and valuation modeling, and expert interpretation of market activities and trends.
The Players: Buy-side, Sell-side, Corporates
Buy-side firms, also known as institutional investment firms, manage pooled investment vehicles such as pension funds, mutual funds, and hedge funds. Analysts in buy-side firms provide important information to investment managers to help them make informed decisions about which stocks to buy, sell, and hold.
Sell-side firms like brokers and banks are not using Wall Street research to make internal
investment decisions. Instead, they provide services to buy-side firms and other clients. Sell-side analysts produce research reports and recommendations that can be sold or used to influence buy-side strategies.
Cowen investment bank is an example of a sell-side firm. Cowen is a top-10 U.S. bank that provides Wall Street research analysis to a wide range of clients across industries, especially in their specialized sectors, which include energy and sustainability, healthcare, cannabis, technology, and more.
Corporations, often referred to as issuers in the investment world, issue equity and debt via sell-side institutions. Public corporations depend on buy-side firms to invest in their companies. To facilitate this, sell-side firms provide research coverage and corporate access that helps buy-side firms make decisions.
AlphaSense’s Wall Street Insights® is the first equity research collection purpose-built for the corporate user. It has leveled the playing field between Wall Street and corporations and been a key link to providing Wall Street research to the corporate market.
The Challenges, Development, and Distribution of Broker Research
The Goals of Broker Research
The high-level goal of broker research is to provide buy-side firms and individuals such as investors and fund managers with the insights they need to make smart investment decisions.
Broker research can help its users to:
- Decide which stocks to buy, sell, or hold
- Recognize new opportunities in their markets
- Identify threats to their investments
- Add insights to their own research reports
How Broker Research has Evolved
In the past, broker research was difficult to access. It was typically available only to large institutional investors or wealthy investment firm clients who could pay for the research themselves. Asset managers often paid for their research using client assets structured into commission bundles.
Regulations around this type of use of funds were very loose. In the late 1990s, the CFA Institute issued what became known as the Soft Dollar Standards, a set of standards created in an attempt to address ethical issues that existed associated with client assets being used to fund research.
The sharpest shift, however, came with the implementation of the EU’s Markets in Financial Instruments Directive (MiFID) II in 2018. MiFID II put into place new transparency requirements for financial firms in many regards. Specific to research, it required all asset managers to either charge clients for research via pre-agreed research payment accounts (RPAs) or otherwise take on the cost themselves.
The MiFID II required research unbundling rules have also had an effect on U.S. firms who sub-advise EU funds, have EU affiliates, or trade on EU markets. The result has been a huge decrease in buy-side research allocation and demand, leaving sell-side firms looking for new ways to connect and provide value.
Alpha Generation Challenges
Alpha refers to any asset or group of assets that, when added to an existing portfolio, generate excess returns without additional risk.
Several challenges over the past two decades have made it more difficult for buy-side firms to find and generate alpha for clients, such as:
- Democratization of data, which makes alpha opportunities more widely visible and pursuable
- Structural changes, such as the rise of passive investing like ETFs
- Regulatory changes that occur as new technologies and innovations emerge
The Evolving Role of Research Analyst
Research analysts specialize in a group of companies from a particular industry or region and develop a high level of expertise on their activities, performance, and markets. While there is no one standard background you can expect from analysts, they generally have experience in the industries they cover (for example, an analyst covering engineering firms may have a degree in electrical engineering).
The analyst workload usually includes 15-20 companies that they cover with the help of a support team. They also track other companies in relevant industries and with important relationships to the companies they cover directly. This gives them important full-sector context in addition to the specific knowledge they develop about the companies they’re responsible for researching.
The role of the research analyst has evolved alongside the technology advances that have been transforming the investment sector. There is an increasing demand for larger scale, data-driven research that requires analysts to understand new research tools and use them to sift through large sets of data to glean insights.
The COVID-19 crisis has also drastically altered research analyst activities, putting a months-long halt on site visits and in-person meetings. In their place, focus has shifted to providing constant, real-time market analysis and actionable recommendations that investors can use to navigate the most uncertain market in recent history.
How Do Research Analysts Help?
Research analysts serve as partners to the professional investment community, providing detailed, expert insight at the company, industry, and market levels.
They develop in-depth historical knowledge while remaining abreast of current market events and trends, handling the challenging job of separating important signals from other industry noise. In short, analysts uncover insights that clients often don’t have the time or resources to find themselves.
Analysts are an excellent source not only for recommendations and forecasts but also for a better overall understanding of market dynamics, larger financial shifts, and potential new opportunities on the horizon. They provide differentiated views that guide clients in the right direction.
Cowen, for example, not only provides research for their clients but also thought leadership pieces that make all players smarter and more informed. Their thematic research focuses on cross-sector collaboration to generate greater levels of insight than siloed research. Their hallmark Ahead of the Curve® series covers emerging topics and controversial issues widely relevant to all types of firms and organizations.
“The buy-side is not the only reader of [Cowen] reports. Through platforms like AlphaSense, we have many corporate readers of our reports who are leveraging materials to their advantage.” -Robert Fagin, Head of Research, Cowen
A Day in the Life of a Sell-Side Research Analyst
The professional lives of research analysts are governed by quarterly earning cycles. The bulk of their “real” work is done between these cycles, during which their daily activities can be split into two categories: input (the process) and output (the product).
Input work is anything related to the process of developing their research products. It can include filtering news and staying up to date on market trends, building financial models, calling and visiting clients, attending industry conferences, and interacting with other important industry players such as consultants, company management, customers, supply chain managers, and suppliers.
Much of the input work analysts do spills over into output work, or delivering the final product. Output work performed by analysts includes hosting conference calls with clients and industry experts, making presentations, writing reports, speaking at conferences, and updating financial models.
Research analysts experience high-intensity periods like quarterly earnings season, time leading up to conferences or events, or times when they or their teams are working on detailed reports and thought pieces in addition to their daily work.
Research analysts must be adept at handling multiple responsibilities, moving quickly between projects and tasks, and handling varying levels of work intensity and pressure throughout the year.
How Corporates, Consultants, and Investors Leverage Wall Street Research to Win
No matter which side you operate on (buy-side, sell-side, or corporate), you can leverage Wall Street research to identify new opportunities and secure wins for your clients. There are several types of research reports you can use to accomplish a wide range of goals.
Initiation Reports are issued when an analyst or firm begins covering a stock. Initiation reports give you an in-depth analysis of the company, including an investment thesis, financial forecasts, key differentiators, and market strengths and risks.
Company Reports are update reports issued periodically after a firm begins covering a stock. Company reports provide an ongoing analysis of the company’s performance and include buy, hold, sell ratings, updated news, M&A activity, and any other information that can impact the valuation of a company.
Industry Reports cover a group of companies within the same industry or sector. Industry reports help firms assess market dynamics and trends and understand competition within the industry. These reports provide a long view of potential industry changes and what the implications of those changes may be.
Commodities Reports are issued on a frequent basis (usually weekly or monthly) and include timely, detailed analysis of commodities within a sector.
Flash Reports are shorter reports usually issued after a news release or other important event related to a company or industry. Flash reports contain expert commentary from analysts that help clients make decisions based on new information and developments.
Cowen, for example, publishes a detailed 1200-page pharmaceutical industry report twice per year. It holds valuable insights for investors in the space, but finding those insights would take a significant amount of time.
So how do you truly leverage Wall Street research to win without sacrificing the time and energy of your analyst teams?
That’s where AlphaSense comes in.
“What [the AlphaSense] smart search does is it finds all of the smart synonyms associated with [the search term] and searches across all of those search terms at the same time . . . The value is that the end user can easily go through snippets rapidly and determine which snippets are most important for them.” -Jim Bode, Global Head of Broker Relations, AlphaSense (on how AlphaSense helps users navigate through high-volume research reports)
AlphaSense in the Real World
AlphaSense clients are demonstrating the many ways a third-party technology tool can enhance, streamline, and accelerate Wall Street research.
Renaissance Macro (RenMac) needed to do in-depth analysis of the quickly-evolving payments ecosystem, but analyst Howard Mason was spending enormous amounts of time sifting through company filings and documents, a process he called “onerous.”
Using AlphaSense, Howard can now search across a variety of sources at one time, depending on AlphaSense’s AI tool to surface the sources most relevant to him. Rather than downloading documents and spending time reading each one closely, Howard is getting a more comprehensive view of the industry that doesn’t just reflect financial data but also real company commentary that can be used to better understand sentiment around trends, challenges, and other happenings within the payments space.
Siemens was stuck in a reactive research process that required hours and days of scouring research reports for relevant information. They were using upwards of 1000 Google alerts and lots of paid research.
The introduction of Wall Street Insights into their research process created a total shift in the Siemens research process from reactive to proactive. Now, Siemens Market Intelligence Leader Bob Nelson reports his team is finding higher quality insights in a much shorter time and utilizes the alert feature so they never miss an important insight or report.
KEMET Investor Relations was depending on a number of sources including Google search, community bulletin boards, and the NIRI website to conduct their earnings research and complete other work related to investor relations.
But they needed a better way to develop detailed communications in a timely way, especially during earnings season. Using AlphaSense, the KEMET team was able to streamline processes, meet deadlines earlier, conduct more comprehensive research, and ultimately allocate more time to strategic work.
Similarly, Richardson Wealth Management analyst Alexander Tjiang was no stranger to sifting through countless transcripts and equity research documents, especially during earnings season. He was manually reading reports line-by-line while trying to evaluate sentiment, updating financial models, and putting it all together to provide recommendations. The process was time consuming.
Using AlphaSense, Alexander reports that he is now able to save 25% of his time to allocate to other strategic endeavors. Specifically, Alexander uses blacklining to identify QoQ changes, table export to extract data into Excel, and theme extraction and sentiment analysis to better understand the tone of company documents and calls.
These case studies demonstrate the many different ways that Wall Street research plays a pivotal role for firms and the individuals within them. More than that, they show that research tools and techniques are evolving. As client demands for more comprehensive research increase, companies must evolve their processes, methods, and strategies to meet these expectations and stay competitive.
The Future of Wall Street Research
Wall Street research has evolved from its old model primarily rooted in commissioned research exclusively available to those able to afford it. Today, it informs all members of the financial ecosystem and acts as a connector between financial institutions and the corporate companies they research and invest in.
“Dialogue with the corporate world is really important; it usually ends up creating great conversations between companies and the analysts. [Our research] is part of a single ecosystem and issuers are a big part of that.” -Robert Fagin, Cowen
The future of Wall Street research lies in its continually expanding visibility and accessibility, and as the world keeps moving faster, research performed by firms like Cowen and smart tools like AlphaSense will be your keys to staying ahead.